RISK CONTROL

RISK CONTROL

Given the loss we have recommended taking in BTX, we thought it was worth touching base on the most important part of investing: risk control.

Risk is controlled by 4 simple processes in investing:

1) Calculating an accurate risk reward ratio. The more work that is put into understanding an investment and its risks and value, the better the odds of avoiding making errors of judgement in terms of risk/reward for each investment. The best way to not lose money is to avoid loss making investments in the first place, but that is not always possible.

2) Allocating capital. If you forced three fund managers to construct a portfolio with the same ten stocks, the performance of each fund would be different. How capital is allocated between the investments available is critical to success.

3) Insurance. Just like car insurance, it is possible to use derivatives to hedge positions and protect against adverse market movements. But like all insurance, it comes at a price and does not always provide a perfect hedge.

4) Stick to what you know. Many investment mistakes a made by those when they move away from their area of expertise. All successful investors have their own system or strategy and they stick to it. This strategy may be progressive and adaptive but the general discipline of sticking to the areas where you are competent applies to any field of endeavour.